MIDAS: Dogs pick up pace as FTSE marches on

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The spending axe means that consumers
are worried and businesses are cautious – but the stock market seems to be ploughing a rather different
furrow.

In mid-August, the FTSE 100 was 5,266. Today it is up by more than
11 per cent at 5,875 after rising to highs last seen in 2008.
The strong performance reflects several factors.

First, the economy does appear to be recovering and analysts are hopeful that this trend will continue, despite the forthcoming
round of spending cuts. Second, brokers are relieved that the spending
review was not worse and that at least its contents are in the open.

Optimistic: John Tiner, left, and Clive Cowdery are expected to pay an annual dividend of 16p at insurer Resolution

Third, company results have generally
been rather good lately. And fourth, borrowing rates remain relatively
low, which should help companies
invest and expand.

For the Midas Dogs of the Footsie portfolio, the more cheerful sentiment
has had a direct and noticeable impact – dividend yields are falling.
In April 2007, when Midas relaunched this long-running experimental
portfolio, the average yield for our ten Dogs was just over five per cent.

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But in 2009 and 2010, yields were averaging about 6.5 per cent and
many seemingly solid Footsie companies were delivering in excess of
seven per cent, which was particularly
good compared with the Bank of England base rate of just 0.5 per cent.

The unusually high yields arose because companies wanted to show
they valued their shareholders’ support,
so they tried to keep dividends as generous as possible. But the mood
in the market was such that share prices stayed stubbornly low.
Companies still want to reward shareholders, but today’s market has a
more upbeat view of their prospects, so share prices are rising and
yields are falling (because, if the dividend remains the same, the
yield falls as a share’s price rises).

In August, our Dogs were Cable & Wireless Worldwide, Home Retail
Group, Aviva, Man, National Grid, Royal Dutch Shell, RSA, Scottish
& Southern Energy, Standard Life and Vodafone. Their average yield
was 6.6 per cent. Since then, CWW and Home Retail Group have left the
Footsie, so they are no longer in the portfolio. Both companies have
had a difficult time in recent months and are now in the next-tier FTSE
250.

They make way for Resolution, the fast-growing life insurer, and TUI
Travel. Resolution was admitted to the Footsie only in September, but
it has immediately joined the Dogs.

The company, founded by entrepreneur
Clive Cowdery and run by former financial regulator John Tiner, buys
life insurance assets and tries to run them more efficiently than their
original owners.

The group is expected to pay a dividend of more than 16p for the
year to December 31. Its shares are 253p, so its yield is nearly 6.5
per cent, one of the highest among the Dogs.
Resolution is expanding and is optimistic about the future.

TUI is in a less comfortable position. The holiday group recently
reported an increase in bookings for winter breaks but this was
virtually overlooked
as it admitted an accounting blunder that forced it to write down 2007
results by £118 million.

TUI had not been accounting for holiday discounts properly, so
finance director Paul Bowtell resigned. Chief executive Peter Long was
apologetic, but the shares still went down and the stock is yielding
5.2 per cent.

There is one other new Dog, drugs giant AstraZeneca.
Pharmaceuticals shares have not been terribly popular in recent months,
amid ongoing fears about their profitability once a number of big
products come off patent.

AstraZeneca did nothing to allay these worries when it reported a
26 per cent decline in pre-tax profits to $2.3 billion (£1.42 billion)
for the three months to September 30.
The company replaces hedge fund manager Man Group, which has been in
the portfolio for a while but finally leaves after last week reporting
the most positive set of results in more than two years.

The portfolio’s average yield is
nearly 5.7 per cent, almost a full percentage point lower than in
August. The portfolio’s value has also risen since August – by more
than ten per cent – but it still lags the Footsie.

In 2007, we invested a notional £10,000 in the Footsie and the same
in the Dogs. Today, the Footsie investment is worth £9,177 but the Dogs
are worth just £5,545.
The Dogs are still a long way behind but they do now seem to be moving
in the right direction. Investors
in this experimental portfolio can only hope they will start running
faster in the New Year.

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